Mortgage Standards Rising

The National Association of Realtors (NAR) recently reported that existing home sales increased in March, which is good news. However, while homes might be more affordable right now, qualifying for a mortgage loan requires higher standards than it did 5 years ago.

Because Fannie Mae, Freddie Mac, and the FHA cannot guarantee mortgages over the conforming loan limit, mortgages over the limit will face higher interest rates and tighter restrictions. Fannie Mae increased costs for borrowers with lower credit scores, less home equity, and second mortgages when it changed what it calls its loan-level price adjustments.

Many consumers today are facing credit problems due to unemployment, under-employment and lower home values, but credit score requirements remain high. While a 580 credit score was acceptable a few years ago, Fannie Mae and Freddie Mac require at least a 620 score for all programs except the Home Affordable Refinance Program (HARP). FHA home loans require a minimum credit score of 640.

Debt-to-income (DTI) ratios, which entail your monthly debt payments relative to your income, are still required to be high as well. Fannie Mae used to allow DTIs up to 55 percent but now typically requires at least 45 percent. Freddie Mac wants at least 50 percent DTI. To compute your DTI, divide your monthly debt payments, such as credit card, car loan, and other loan payments, by your gross monthly income.

Home loans with no down payment have all but disappeared. The minimum required down payment when buying a primary home is typically 3.5 percent of the sales price, which will allow you to get an FHA loan. Conventional loans typically require 5 percent to 10 percent down.

Home loan qualification standards will likely remain high for now, so plan carefully if you’re considering a new home purchase. Focus on improving your credit score, saving up for a down payment, and lowering your debt-to-income ratio, and you can be on your way to owning a new home. Contact us to discuss your options.

Troy Batson is a licensed broker in the State of Oregon ~ troybatson.com ~ Duke Warner Realty ~ 1033 NW Newport Ave. Bend, OR 97701 ~ (541)382-8262